(Bloomberg) — As buyers and sellers of carbon credits grapple with signs of a shrinking market, others are seizing the moment.
Most read from Bloomberg
Jim Bunch, former director of Goldman Sachs Group Inc., is teaming up with law firm Linklaters and London nonprofit Scope 3 Climate Capital to help develop and promote an alternative to carbon credits. The group says it is in discussions with a number of multinationals in sectors ranging from technology to steel production.
The aim is to reduce the private sector’s reliance on carbon credits as a way to meet net-zero pledges. Bunch, who co-founded US climate consultancy Impact Delta in 2020, says the aim is to focus on companies’ supply chains as they often account for the lion’s share of reported emissions. He says this will also allow institutional investors to address portfolio climate risks that conventional diversification tactics cannot address.
“Pension funds with 50-year liabilities cannot diversify carbon,” Bunch said in an interview. “Climate change is therefore an existential threat to their full liability on the balance sheet.”
The product – known as a Sector Transition Acceleration Contract – is designed to reduce actual emissions in companies’ supply chains. That contrasts with offsetting it by financing environmental projects, which is how carbon credits work.
The details:
The product is a sector transition acceleration contract, or STAC. While a carbon credit is supposed to represent one ton of CO2 avoided or removed from the atmosphere, often through environmental projects in developing countries, a STAC functions as a direct transaction between a company and its supplier. Companies using STACs essentially reward their suppliers for emissions reductions by, for example, placing money budgeted for credits into escrow accounts, which are released to suppliers once they meet climate milestones.
Alex Shopov, head of ESG structured finance at Linklaters, says he and his team used structured finance and securitization techniques to create a STAC certificate that suppliers can also “take to their bank and pledge as collateral.”
To tackle emissions in their supply chains, companies have so far tended to fall back on the voluntary carbon market where carbon credits are traded. But after a series of controversies, including accusations of greenwashing on major projects on which such credits are based, that market shrank 22% to just $1.1 billion last year, according to MSCI.
High-level efforts are underway to address the risks posed by the VCM. These include new US guidelines to restore confidence in the market, which Treasury Secretary Janet Yellen said can “do better” and serve as a “powerful ally” against climate change. The U.S. Commodity Futures Trading Commission is also working to finalize its carbon credit guidelines, with a rulebook expected by the end of the year.
Wall Street is eager to cash in on companies’ efforts to reduce their reported emissions, whether through carbon credits or other financial products. JPMorgan Chase & Co., Bank of America Corp. and Barclays Plc are among the banks that have built carbon trading and finance desks. Goldman and Mirova, a subsidiary of Natixis Investment Managers, have set up funds that invest in green projects and generate in-kind returns through offsets.
STACs are part of a growing effort to produce legally defined financial instruments that can help decarbonize supply chains. The American Bar Association has published model contracts for companies to use, while the UK Chancery Lane Project offers 160 climate clauses that it says can be immediately incorporated into contracts and agreements.
Earlier this year, the European Union passed legislation requiring companies to draw up transition plans, documenting actual emissions reductions. Lawyers advising companies and banks in the bloc have made it clear that carbon credits cannot be used to claim any reduction in gross emissions.
Chris Perceval, senior engagement director at S&P Global and member of the steering committee of the joint venture between Impact Delta and Scope 3 Climate Capital, says there is still a role for carbon credits.
“What we’re trying to do is find something that’s higher up the hierarchy and that, if the economy doesn’t deliver, relocations can still be part of the implementation plan,” he said.
Most read from Bloomberg Businessweek
©2024 BloombergLP
